FSA Consortium Accounting Standard Setting Update May 2015 Deloitte Foundation/Federation of Schools of Accountancy Faculty Consortium May 2015
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FSA Consortium Accounting Standard Setting Update May 2015 Deloitte Foundation/Federation of Schools of Accountancy Faculty Consortium May 2015 Agenda Topic Major Projects Consolidations Financial Instruments Leases Disclosure Effectiveness Other FASB Standard-Setting Activity Foundational Projects Simplification Projects New Revenue Recognition Standard 2 Copyright © 2015 Deloitte Development LLC. All rights reserved. Consolidations Amendments to the Consolidation Analysis ASU 2015-02 guidance Overview • Issued February 2015 • Original Plan: − Address when Decision Maker of a Variable Interest Entity is acting as principal (controls) or agent (does not control) ◦ The ASU reduces the likelihood that fees paid to a decision maker or service provider will result in consolidation − Eliminate deferral for investments in certain investment funds • Additional provisions: − More entities will be Variable Interest Entities ◦ A limited partnership would be considered a VIE unless a simple majority or lower threshold (including a single limited partner) of the LPs have substantive kick-out rights or participating rights 4 Copyright © 2015 Deloitte Development LLC. All rights reserved. Determining whether an entity is a VIE • Entities other than limited partnerships − The ASU clarifies that a two-step process should be used to determine whether the equity holders have power: Step 1: Do the equity at risk holders (as a group) have power over the most significant activities of the entity through their equity interests? Yes The equity holders have power — consider other VIE conditions No — a decision maker has power Step 2: Does a single equity holder have a kickout or participating right? Or: Is the decision maker an agent of the equity holders (does not own a variable interest)? Yes No The equity holders do not have power 5 Copyright © 2015 Deloitte Development LLC. All rights reserved. Who should consolidate? Voting interest model Limited partnerships: • A general partner will not consolidate a partnership that is not a VIE • A limited partner is required to consolidate a partnership that is not a VIE if the limited partner has the substantive ability to unilaterally dissolve the partnership or remove the general partner without cause All other entities: • No change from current guidance • Ownership of more than 50 percent of the outstanding voting shares of another entity would generally result in consolidation 6 Copyright © 2015 Deloitte Development LLC. All rights reserved. Financial instruments Classification and measurement Classification and measurement Changes to U.S. GAAP Equity investments • Most equity securities will be carried at fair value through net income − Practicability exception will be permitted for equity securities (1) that do not have readily determinable fair values and (2) that do not qualify for the net asset value (NAV) practical expedient − Equity method investments (including impairment) are excluded from the scope of the new guidance • Simplified impairment model would apply to equity securities for which the practicability exception has been elected − Eliminates the notion of other than temporary impairment 9 Copyright © 2015 Deloitte Development LLC. All rights reserved. Classification and measurement ChangestoU.S.GAAP(cont’d) Instrument-specific credit risk for fair value option liabilities • An entity would be required to separately recognize in OCI changes in fair value attributable to instrument-specific credit risk • However, for derivative liabilities any changes in fair value attributable to instrument-specific credit risk would continue to be presented in net income • An entity can use one of two methods to measure the change in fair value attributable to instrument-specific credit: − The excess of total change in fair value over the change in fair value that results from a change in a base market risk (e.g., risk-free interest rate) or − Use another method that it believes is a more faithful representation Next steps • Effective date will be determined at a future FASB meeting • A final standard will be issued in second half of 2015 10 Copyright © 2015 Deloitte Development LLC. All rights reserved. Impairment Impairment project Where we are today Drivers of impairment project • Response to global financial crisis • Opportunities to simplify guidance • Opportunities for international convergence FASB IASB • Expected to issue final guidance in the second half of 2015 • Issued final amendments to IFRS 9, Financial Instruments, on July 24, 2014 • Currently finalizing amendments to impairment guidance • IFRS 9 (2014) will be effective for periods beginning on or after January 1, 2018 • Not yet deliberated effective date. Do not expect anything sooner than January 1, 2018 • Early adoption is permitted KEY TAKEAWAY: Ready or not, here it comes! 12 Copyright © 2015 Deloitte Development LLC. All rights reserved. Impairment project Determining which impairment model to apply Debt instrument (in scope of the current expected credit loss model) or availablefor-sale (AFS) debt security? HTM debt security or loan Current expected credit loss (CECL) model Purchased or originated Recognize Allowance and day 1 expense for all expected credit losses Purchased credit-impaired (PCI) assets or certain beneficial interests in scope of ASC 325-40? AFS debt security ASC 320 (subject to amendments) Gross-up approach 13 Copyright © 2015 Deloitte Development LLC. All rights reserved. Impairment project CECL model: Expected credit losses Topic Considerations Recognition • No minimum threshold for recognition of impairment losses • Credit impairment would be recognized as an allowance (or contraasset) instead of a direct write-down • In certain situations an entity can recognize zero credit losses. However, no explicit guidance will be provided on what these situations would be Measurement • Estimate of expected credit losses represents all contractual cash flows that an entity does not expect to collect over the life of the asset • Consider information about historical loss experience, current conditions, and reasonable and supportable forecasts • Must reflect the risk of loss (best estimate not permitted) • Variety of methods to develop an estimate of current expected credit losses are permitted (e.g., DCF, loss-rate methods, provision matrix, etc.) 14 Copyright © 2015 Deloitte Development LLC. All rights reserved. Impairment project CECL model: Expected creditlosses(cont’d) Topic Considerations Unit of account • Credit losses should be evaluated on a collective (i.e., pool) basis when similar risk characteristics are shared (including HTM securities) • When similar risk characteristics are not shared, a financial asset should be evaluated for impairment individually Practical expedients • Collateral-dependent financial assets Write-offs • Consistent with current practice, an entity will write off the carrying amount of a financial asset when the asset is deemed uncollectible 15 • Financial assets for which the borrower must continually adjust the amount of securing collateral (e.g., repurchase agreements and securities lending arrangements) Copyright © 2015 Deloitte Development LLC. All rights reserved. Impairment project Available-for-sale (AFS) debt securities Proposed guidance • CECL Model would not apply to AFS debt securities. Instead, impairment of AFS debt securities would continue to be accounted for under ASC 320, Investments — Debt and Equity Securities • The impairment model in ASC 320 will be revised to: 1. Requireanallowanceapproach(vs.permanentlywritingdownthesecurity’scost basis) 2. Removetherequirementtoconsider“duration”oftimefairvaluehasbeenlessthan amortized cost when assessing whether an impairment is OTTI 3. Removing the requirement that an entity must consider recoveries of fair value after the balance sheet date when assessing whether a credit loss exists • Write-off guidance will apply to AFS debt securities 16 Copyright © 2015 Deloitte Development LLC. All rights reserved. Impairment project Next steps, transition, and effective date Next steps • Further deliberations by the FASB • Address effective date • Issue final standard Transition Effective date • Modified retrospective application • Not yet determined • Recognize a cumulative-effect adjustment in the first period of adoption • Expected to be addressed near the end of deliberations • Early adoption not permitted • Not expected to be sooner the January 1, 2018 • Certain disclosures required 17 Copyright © 2015 Deloitte Development LLC. All rights reserved. Impairment project IASB’sthree-bucket approach Bucket 1: 12 months expected credit loss allowance* • All financial assets initially categorized in this bucket** Transfer out of Bucket 1 …whentherehasbeena significant deterioration in credit quality since initial recognition (except high quality assets) Buckets 2 and 3: Lifetime expected credit loss allowance • Evaluation performed on groups of financial assets and individual financial assets * 12 month expected credit losses = lifetime expected credit losses for financial assets for which a loss event is expected within the next 12 months ** Except for purchased debt instruments with explicit expectation of credit losses at acquisition, and some trade/lease receivables. 18 Copyright © 2015 Deloitte Development LLC. All rights reserved. Hedging project Hedging project Highlights of redeliberations • Simplify hedge accounting/ potentially permit hedge accounting for more hedging strategies • the FASB will discuss the following issues: − Hedge effectiveness requirements − Whether the shortcut and critical-terms-match methods should be eliminated − Voluntary dedesignations of hedging relationships − Recognition of ineffectiveness for cash flow underhedges − Hedging components of nonfinancial items − Benchmark interest rates − Simplification of hedge documentation requirements − Presentation and disclosure matters 20 Copyright © 2015 Deloitte Development LLC. All rights reserved. Leases project update Leases project What’sinandwhat’sout Scope • Generally similar to current U.S. GAAP More pressure on differentiation between leases and services because leases will be on balance sheet! • Excludes leases to explore for/use nonregenerative resources, leases of biological assets, and leases of intangible assets Short-term lease • Lease term of 12 months or less (changed from ED) • Elective in nature by underlying asset class • Accountedforinamannersimilartotoday’soperatingleases 22 Copyright © 2015 Deloitte Development LLC. All rights reserved. Leases project Definition of a lease A contract that conveys the right to use an asset for a period of time, in exchange for consideration Identified asset Requires an identified asset Control Must have right to direct the use and obtain substantially all economic benefits from use • Explicitly or implicitly specified • Substitution rights must be considered if substantive (i.e., practical ability + economic benefit) • Direct the use — shouldfocusontheabilitytodirect“how andforwhatpurpose”theassetisused • Obtaining substantially all economic benefits from use — can be obtained directly or indirectly in many ways and includes the underlying assets primary output and byproducts 23 Copyright © 2015 Deloitte Development LLC. All rights reserved. Leases project Lessee accounting model Overview • Leases (except short-term leases) on balance sheet Measurement • Introduces the right-of-use asset approach under which a lessee records: − Lease Liability: PV of minimum lease payments over lease term ◦ Excludes renewal periods unless reasonably certain of exercise ◦ Excludes variable lease payments similar to current GAAP − ROU asset: right to use the leased asset ◦ Initially at present value(PV)ofleasepayments+lessee’sinitialdirectcosts ◦ Re-measurement depends on lease classification (FASB only) 24 Copyright © 2015 Deloitte Development LLC. All rights reserved. Leases project Lesseeaccountingmodel(cont’d) Subsequent measurement • ROU asset − Boards are not converged on the subsequent measurement: FASB approach IASB approach Dual-model approach — a lessee would Single-model approach — a lessee apply guidance similar to IAS 17 when would account for all leases as a determining whether a lease should be financed purchase of the ROU asset classified as Type A or Type B Type A lease Consistent with today’scapital leases — expense will be front-loaded 25 Type B lease Expense will be recorded on a straight-line basis Copyright © 2015 Deloitte Development LLC. All rights reserved. Leases project FASB lease classification criteria CLASSIFICATION CRITERIA Would accountforasaTypeAleasewhenthelease… SomeTypeAleaseindicators… Transfers ownership by end of lease term; Includes a purchase option that is thereasonably lessee is reasonably certain of exercise; certain to or is major part of economic life of asset; or exercise; Lease term is a transfer and rewards of There PV of MLP amountof tosubstantially substantiallyall allof ofthe FV risks of asset. ownership of the asset Otherwise the asset would be classified as a Type B lease. Although the evaluation is similar to current U.S. GAAP, the bright-line rules in current U.S. GAAP would be eliminated 26 Copyright © 2015 Deloitte Development LLC. All rights reserved. Leases project Lessor accounting model Existing lessor accounting retained with minimal changes: • Classification criteria would be similar to IAS 17 − Type A lease: generallyconsistentwithtoday’ssales-type/direct-finance leases − Type B lease: generallyconsistentwithtoday’soperatingleases • Differing views on recognizing dealer profit for sales-type leases: − FASB view: up-front recognition of manufacturer’sprofit would be precluded if control of asset is not transferred to lessee − IASB view: manufacturer’sprofit, if any, should be recognized up front 27 Copyright © 2015 Deloitte Development LLC. All rights reserved. Leases project Lesseeaccountingmodel(cont’d) Illustrative example: * The straight-line expense approach only applies to the FASB’s proposed approach under U.S. GAAP. In March 2014, the IASB tentatively decided on a single-model approach that would treat all leases as the financing of the purchase of the ROU asset whereas the FASB decided on a dual-model approach. 28 Copyright © 2015 Deloitte Development LLC. All rights reserved. Leases project Final thoughts Other provisions redeliberated • Presentation in Balance Sheet, Income Statement, and Cash Flow Statement • Subleases • Related-party leases • Leveraged leases • Build-to-suit transaction • Sale and leaseback accounting • Lease modifications • Disclosure requirements • Transition Next steps • Effective date • Sweep issues • Other consequential amendments 29 Copyright © 2015 Deloitte Development LLC. All rights reserved. Other Major Projects What’sNext? 30 Copyright © 2015 Deloitte Development LLC. All rights reserved. Disclosure Framework Projects Disclosure framework projects Overall: Board Decision Tool Entity Decision Process Projects: Fair Value Disclosures Income Tax Disclosures Defined Benefit Plan Disclosures Inventory Disclosures Interim Disclosures Other Accounting Topics 32 Copyright © 2015 Deloitte Development LLC. All rights reserved. FASB Other Projects Background FASB Project Structure Focused Initiatives on Improving Standard Setting Foundational Projects General Standard Setting Long term projects to improve the“core”offinancial reporting: Improve transparency through its projects on recognition, measurement, presentation, and disclosure: Conceptual framework Disclosure framework Definition of a Business Insurance Goodwill for PBE Intangible Assets Liabilities and Equity Simplification Initiatives Short-term, targeted improvement of existing U.S. GAAP: Extraordinary/Unusual Items Presentation of Debt Issuance Costs Measurement Date for Plan Assets Cloud Computing Costs Subsequent Measurement of Inventory Accounting for Income Taxes Share-Based Payment Improvements Balance Sheet Classification of Debt 35 Copyright © 2015 Deloitte Development LLC. All rights reserved. FASB’s Simplification Initiative Background and Objectives • FASB simplification initiative commenced in 2014 • Designed to identify limited-scope projects to simplify U.S. GAAP in the near term 36 Copyright © 2015 Deloitte Development LLC. All rights reserved. Simplification Initiative – Final Standards Extraordinary Items Debt Issuance Costs Pension Plan Measurement Date 37 Copyright © 2015 Deloitte Development LLC. All rights reserved. Current Simplification Projects Notable short-term, targeted improvements to existing U.S. GAAP: Subsequent Measurement of Inventory Accounting for Income Taxes Share-Based Payment Improvements Balance Sheet Classification of Debt 38 Copyright © 2015 Deloitte Development LLC. All rights reserved. Questions? This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. 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